Seniors & student loan debt: A growing crisis
As you head into retirement, you may be considering beach vacations and days spent doing what you love. But many seniors have another reality: heaps of student debt.
Over the last 10 years, the number of seniors with outstanding student loans has quadrupled — from 700,000 in 2005 to 2.8 million in 2015. In 2015, the amount of student loans owed by older adults was an estimated $67 billion.
Three ways that seniors acquire student loan debt
1. Paying for children/grandchildren’s education
A large percentage of seniors’ student loans are due to paying for children or grandchildren’s education. More and more lenders are requiring co-signers on their loans in order to back student loans.
2. Midlife returns to school
Some seniors took out loans later in life to return to school or training.
3. Income-driven loan plans
Depending on the plan and the borrower’s understanding of it, some seniors get caught up in a cycle of only paying interest on their loans rather than the balance itself. This can happen in an income-driven plan, which offers relatively low payments.
How does student loan debt impact seniors?
Many seniors are already unsure how their finances will work as they transition into retirement. Adding student loans to the mix can impact an already tight financial situation. Because of this, seniors are more likely than any other generation to default on their student loans.
If you default on your student loans, the government has the right to take up to 15% of your Social Security benefits. There are some limits to this, however. For Americans with lower incomes and benefit levels, Social Security repayments (called offsets) cannot reduce benefits to less than $750 per month. This amount is not adjusted annually for inflation.
In 2015, 114,000 seniors had a portion of their Social Security benefits taken — a 440% rise from 2002.
“This is a relatively new phenomenon in the financial industry,” Clay Hartman, partner and senior wealth advisor at Frontier Wealth Management, explains. “Before 2002, we didn’t see many seniors with student loan debt, especially not ones defaulting. It’s hard to see where the future may head in this direction if steps aren’t taken to remedy it.”
What options are available to seniors with student loan debt?
If you’re at risk for having your benefits seized, or are looking for generic relief from your student loan debt, here are some options you can take, according to Hartman.
Rehab your loan
If you default on your loan, your first step should be to get yourself out of collections. To do this, you will have to make nine on-time payments (based on your income) over 10 months, called rehabilitation. Once you do this, your loan will be taken from collections and returned to your loan servicer, which will give you back your Social Security benefits. Note: You will still have your full loan balance.
Apply for disability
You may be able to cancel your loan if you have a condition that is not expected to improve. This is a pretty tricky and bothersome process (you have to document your disease annually), but it is effective. One-third of people in default were able to either pay off their loans or cancel them completely using this option. Note: You will still have to pay taxes on your loans.
Enroll in an income-driven repayment plan
Some loans are eligible for repayment plans based on income, which can be very helpful for seniors in retirement. With these plans, your bill is capped at a certain percentage of your income. If you do not pay it off in 20 years by paying your capped payment, the outstanding balance will be forgiven. It will also be forgiven if you pass away. Note: You may pay more in interest over the lifetime of your loan with this option, as mentioned above. But if you’re at a standstill, this can be a good option.
Apply for student loan forgiveness programs
There are a variety of student loan forgiveness programs available to all debtors. Check out this full list from Student Loan Hero. Note: You may or may not qualify for these programs, so read their requirements carefully.
Ultimately, Hartman says, the best thing you can do is seek expert help. Student loans can be complicated and advice isn’t always widely applicable. The recommendations above are general and may not apply to everyone in all situations. Hiring a financial planner or other expert can bring you peace of mind and help you sort through your options with ease.